JVP's Erel Margalit, the first Israeli to make ''Forbes'' Midas list, says now is the time to invest.
Jerusalem Venture Partners founder and managing partner Erel Margalit sits in JVP's New York office. He stresses that JVP is an international venture capital fund. "We have a very strong core business in Israel, where 60% of our deals take place, but we're a fund that uses this leverage to become an international fund that also invests in start-ups on the US East Coast and Europe, and we're now preparing to do business in China and Japan. We made our first investment in China a few months ago."
This year, Margalit was the first Israeli to be included in the "Forbes" Midas list, which rates the world's best venture capitalists. In 1993, Margalit organized the financing for JVP's first $20 million fund. JVP now manages $675 million. Its most successful to date was the sale of Chromatis Networks to Lucent Technologies (NYSE:LU). JVP earned $165 million on the deal. JVP also earned a hefty $60 million on the exit of Precise Software Solutions.
JVP closed its last fund in 2001, raising $405 million instead of a planned $500 million. Its investment portfolio shrank by $36 million by the end of 2002, out of $121 million in investments. The numbers appeared a year ago in the financial report of California Public Employees Retirement System (CalPERS), which invested $7.5 million in the fund. Despite the reductions, thanks to the Chromatis exit, JVP was still one of Israel's best venture capital funds in terms of return for investors.
An edge in Israel
JVP focuses on early stage software, network, semiconductor, communications, and wireless infrastructure companies. JVP has a longstanding cut and dried formula for turning companies into market leaders. Margalit explains, "We're a group that closely raises international companies. Every start-up working with us shares in our international discipline. We start at the founding and R&D stages in Israel, but 70% of the companies' headquarters are moved to the US after 18 months, if that's where the companies' markets are. This allows us to be free of geographical constraints. We focus on a particular sector, look for promising start-ups in that sector, and make our selections regardless of the company's location. We usually select Israeli companies, because we have an edge here and because there are excellent companies here.
"Since we have offices in Jerusalem, New York, London and Tokyo, we can help companies in those places. Our presence there as investors has changed our status. This is why we're considering opening an office in China, too."
Margalit is very involved in JVP's portfolio companies. He says he senses a recovery after several tough years working with struggling companies. "Other investors disappeared during that period. For example, Sepaton faced a hopeless situation when its lead investor, Battery Ventures, decided not to invest any more in it. But we decided to continue to finance the company, and it's now one of the more interesting companies on the market. Sheer Networks suffered terrible tribulations during its switch from software to telecommunications, and we hope it will create a breakthrough. We created a strong investment group for Cogent Communications (AMEX:COI), a communications provider founded in 2000, and it will have $95 million in sales this year. Sphera, which was in trouble when its market vanished, is starting to show signs of an extraordinary recovery."
There's a lot more good money
Margalit does not forget the companies that fell by the wayside. "We don't abandon companies halfway down the road. That's both to our credit and loss. We've had failures, but that's part of our culture. We work closely with entrepreneurs and we don’t abandon them when the going gets tough."
In order to expand its deals pipeline, JVP invested in a privatized incubator, JVP Studio, run by CEO Elie Wurtman and president and CTO Haim Kopans, which focuses on raising media related companies. JVP acquired the incubator for a bargain price of only a few tens of thousands of dollars. Wurtman, Kopans and other JVP Studio managers have a strong entrepreneurial record. Wurtman was a cofounder of NomadIQ, Ambient Corp. (OTCBB:ABTG) and Deltathree.com (Nasdaq: DDDC). Kopans was a cofounder of Precise Software Solutions.
JVP will invest several million dollars in JVP Studio in the coming years, and will manage the incubator jointly with the Office of the Chief Scientist. JVP Studio is due to simultaneously handle five start-ups a year. JVP will provide added value services that incubator-based start-ups rarely receive, including legal, management, and business development services. For JVP, the incubator is a hedge against investing in new companies. Margalit says, "It will be easier to invest in companies raised in the incubator."
Most of JVP's investors are US, European and Asian institutional and strategic investors, including Access, AXA, Bank Leumi (TASE:LUMI), Bank of America (NYSE:BAC), Government of Singapore Investment Corporation (GIC), Singapore fund Technopreneurship Investment Funds (TIF), Columbia University, Massachusetts Institute of Technology (MIT) pension fund, Hebrew University of Jerusalem,Technion - Israel Institute of Technology, Hadassah Medical Organization, Nortel Networks (NYSE; TSX:NT), Infineon (NYSE; XETRA:IFN), and the Finnish government pension fund. JVP has four employees who maintain regular relations with its investors.
"Globes": What will the funds' returns be in the wake of Chromatis?
Margalit: "Everyone knows that JVP's funds have good returns. Every fund has some portfolio companies with the potential to be market leaders. The question about the latest crop is the price paid for these companies. Obviously, the deals won't be in the billions, but in the hundreds of millions. But if you work properly, you can generate good returns for your investors. I think it will happen soon. Exit opportunities are growing, and we plan to participate."
Unlike other shareholders in PowerDsine who sold a part of their stakes last week to General Pacific Partners at a company value of $200-250 million, JVP held onto its shake. It prefers to wait. Sources close to PowerDsine believe that JVP believes it can make a better exit.
Will you raise another fund?
"There's time. We still have money for investments. Everyone's rushing about to raise money now, and we like to raise money when no one else is. This is a good time to invest, not to raise money. Very interesting projects are coming up now by experienced, modest, entrepreneurs, who understand the international process."
